Tight Liquidity, Looming Data Prompt Talk of More China Easing

Speculation over whether China’s central bank will cut the reserve requirement ratio (RRR) for lenders as early as this weekend heightened on Thursday after local media reports urged the People’s Bank of China (PBoC) to act to boost liquidity and spur economic growth.

The China Banking Association wrote in a front-page editorial in the China Securities Journal on Tuesday that the central bank needs to cut the banks’ RRR, currently at 20 percent, to ease a short-term liquidity crunch.

The PBoC pumped about 143 billion yuan ($22.53 billion) into the banking system on Tuesday following a 125 billion yuan injection via two reserve repo offerings the previous week. The last time it injected liquidity into the market in May, it was followed by a cut in the banks’ reserve requirements, triggering talk that this time around as well the central bank may follow up with a cut.

Bank lending was also weak in June. China's 'Big Four' banks issued 180 billion yuan ($28.3 billion) worth of new loans, the Shanghai Securities Journal reported on Tuesday, down about 28 percent from the 250 billion yuan in new loans the four banks issued in May.

“We think an imminent RRR cut ahead of the June CPI inflation release (on Monday) is likely,” Jian Chang, China Economist with Barclays in Hong Kong, told CNBC. She added that recent liquidity injection was just a short-term solution and more needed to be done.

Next week, China is expected to release June trade and inflation data. Economists are expecting inflation to ease from 3 percent in May, giving the central bank more room to cut the RRR.

Another economist who said a reserve ratio cut could happen as early as this weekend is Johanna Chua, Chief Economist of the Asia Pacific region at Citi.

“It (RRR cut) usually comes during a weekend. So, yes, you would expect that it could happen as soon as this week. Next week, we are going to have a slew of economic data out of China, which should give an indicator of economic activity in June, which should still be fairly weak. We expect it soon, hopefully,” Chua told CNBC Asia’s “Squawk Box”.

Since November the central bank has cut RRR three times, at 50 basis points each. It also cut interest rates by 25 basis points in early June to bolster economic growth, which is seen falling below 8 percent in the second quarter. This will be the sixth successive quarter of slower year-on-year growth.

Frederic Neumann, HSBC’s Co-Head of Asian Economics Research, said he expects a RRR cut very soon given the weak official PMI (purchasing managers index) in June that showed the factory sector was decelerating.

However, he added that the easing may not come before the release of more economic data next week. “If they cut this weekend, it would suggest that numbers next week are bad, and markets would be scared,” he told CNBC. “So that would suggest that they would hold out till after the data is out. If they do it before, the market is going to go, Oh my god, they know something we don’t.”